Ethics Case Study of the Week: Unaware of Overcharging Clients?

By Gary Sarkissian posted 12-14-2020 08:00


CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust.  Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.  

As investment professionals, we are certain to face important ethical decisions in our day-to-day activities.  Some scenarios we encounter will be straightforward, while others may be more complex.  No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to evolve with products undergoing innovation and a regulatory environment continuing to adapt. 

For that reason, each week we will feature a sample case from CFA Institute’s Ethics in Practice Casebook.  Each case is built upon a real-life example that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation.  At the end of the case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.  

This week’s case involves Standard III(A) Loyalty, Prudence, and Care. 

Billing and Fees - Unaware of Overcharging Clients
O’Reilly is chief financial officer of Global Strategic Partners (GSP), a global investment adviser that merged with Holland Advisers, a smaller regional investment adviser. As a result of the merger, GSP becomes the adviser of record for several thousand Holland clients. For a period following the merger, GSP maintains Holland’s legacy billing system for original Holland clients until those clients can be converted to GSP’s billing system and platform. When the Holland billing system is converted, O’Reilly reviews the client billing information to ensure that it is correctly copied into the GSP billing system.

Unbeknownst to O’Reilly, Holland’s billing system has a number of billing inaccuracies. For instance, Holland’s billing system inadvertently causes client advisory fees to default to the highest available account fee when client accounts in one advisory program are transferred between branches. Also, Holland’s billing system charges outside manager fees on assets that are held in money market accounts that do not use an outside manager. Finally, Holland’s billing system does not reimburse advance-billed fees when clients terminate their accounts. Some of these fee billing errors resulted from coding or other systems errors, whereas others were caused by administrative errors, including the failure of Holland personnel to immediately input negotiated lower fee rates into the billing system. As chief financial officer of GSP, O’Reilly

A.  is not responsible for inadvertent billing system errors by Holland before the merger.
B.  fulfills his responsibilities by reviewing client billing information for Holland clients to ensure that it is correctly copied into the system.
C.  fails to meet his ethical responsibilities to his firm’s advisory clients.
D.  acts appropriately as long as he remedies Holland’s billing errors once the client accounts are converted to GSP’s billing system and platform.

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit

This case relates to CFA Institute Standard III(A): Loyalty, Prudence, and Care, which states that CFA Institute members must act with reasonable care and prudent judgment when acting for the benefit of their clients. According to the facts, advisory clients of Holland Advisers are overcharged on their fees as a result of errors in the Holland billing system. After the merger, these investors become clients of GSP, and “for a period following the merger,” GSP uses Holland’s billing system. Although the errors may have been inadvertent and created by personnel of another entity at a time that predated O’Reilly’s involvement, they carry over and become O’Reilly’s responsibility once GSP uses the inaccurate billing system, even temporarily.

As chief financial officer, O’Reilly becomes responsible for the accuracy of the rates charged clients and the billing system used to collect client fees. Fixing the issues when the billing is converted to the GSP system does not account for the initial period of overbilling by GSP when using the Holland system. It is not enough for O’Reilly to ensure the accuracy of the information being transferred. He also should have confirmed that the fee information was accurate and consistent with the clients’ advisory agreements. Otherwise, the billing anomalies have the potential to cause the incorrect fee rates to transfer into GSP’s billing system. Choice C is the best answer.

This case is based on a 2017 Enforcement Action by the US SEC.

Photo by Karolina Grabowska from Pexels  

© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice.  This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.


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